Taiwan said it will ease restrictions on foreign investment in stocks as part of a plan to increase overseas access to its markets and make itself a regional financial center.
The government will eliminate a $7.5-billion ceiling on the value of stocks foreign investors can hold, the Finance Ministry and central bank said. Instead, overseas stock purchases will be limited to 12% of the market's total capitalization.
That limit would be equivalent to $29.7 billion of stocks, based on the capitalization on Dec. 31. Overseas investors already own or have applied to buy more than $8 billion in Taiwanese stocks, according to government figures.
Individual foreigners still cannot buy Taiwanese stocks directly. Overseas investment is instead limited to approved institutions such as insurance companies, pension funds and mutual funds managed and sold overseas by Taiwanese companies. Foreign financial institutions have been allowed to trade Taiwanese stocks directly since 1991.
Stocks are likely to rally on the news Saturday, analysts said, when the Taiwan Stock Exchange reopens after a one-week recess to celebrate the Chinese New Year. The announcement will help offset concerns that caused shares to take a dive in January. The stocks most likely to rise are those investors think will eventually become targets of overseas buyers, analysts said.
It will be some time, to be sure, before the new rules are implemented and foreign investors are able and willing to substantially increase investments in Taiwanese stocks.
"All the major financial institutions are now kind of allergic to emerging markets," said Albert Lin, manager of the $250-million Taiwan Fund, listed on the New York Stock Exchange. "But when they start to look at emerging markets again, Taiwan will definitely be a better-looking place."
Nor will the reforms change the ability of the Central Bank of China to slow the inflow of foreign funds. Before a foreign institution can invest in Taiwanese stocks, it must obtain clearance from the central bank and the Securities and Exchange Commission. As of December, the bank had yet to approve applications for $3 billion in foreign investment already authorized by the SEC.
Ben Chen, Taiwan manager for Barclays de Zoete Wedd, says his company has waited more than eight months for permission from the central bank to bring in $150 million for investments already approved by the SEC.
Now, Taiwan's finance minister, Lin Chen-kuo, said Central Bank Governor Liang Kuo-shu told him he would have the bulk of these applications approved "in a few months."
The reforms are part of the government's main plan for this year--to increase Taiwan's appeal as a regional financial center.
The central bank has limited overseas investment out of concern that a flood of foreign capital would cause money-supply growth to accelerate, pushing up inflation.
The bank is also worried that an increase in demand for the Taiwanese dollar will cause the currency to appreciate, which could hurt Taiwanese companies' cost-competitiveness, analysts say.
"The central bank is quite smart," Chen said. "They know that given the current market condition in the global equity market, there shouldn't be a major influx of market capital" as a result of the reforms.
Last month, Taiwan's main stock index fell more than 11% amid concerns about the health of China's senior leader, Deng Xiaoping, the introduction of a new system for settling stock trades and the flight of foreign funds from emerging markets such as Taiwan's.
Overseas investors have sold more stocks than they have bought here for the past three months. The Mexican financial crisis prompted investors in developed countries to transfer funds from emerging markets around the world to places they perceive as less risky.